Controlling Your Own Destiny

Dependencies & Failure Points

This is a weekly newsletter about the art and science of building and investing in tech companies. To receive Investing 101 in your inbox each week, subscribe here:

---

Years ago, I was in a state of "figuring stuff out." I'd just sold my first business, and I wasn't exactly sure what to do next. I wasn't steeped in startup culture, so I couldn’t just go around angel investing. I didn't even really know what venture was, and I had been running a company for 4 years so I was like an empty-nester who was a good parent, but a boring dude. "What do I do now?"

Then, a friend of mine told me about competitions like XPRIZE, led by Peter Diamandis that setup financial rewards for winning certain types of challenges. The idea of tackling a known problem fascinated me, but most of the challenges were for rocket scientists and roboticists. As we dug into the details, we came across a similar program called D-Prize.

A core idea of the challenge is that a lot of problems have already been solved, but the solution has failed to be effectively distributed (the "D" in D-Prize). So, my friends and I started a company in line with the challenge. The problem to solve? Solar power in Africa.

As part of the challenge, we created a distribution solution. Solar lamps exist, but effectively selling them to rural villages in countries like Uganda is difficult. We decided to partner with organizations called SACCOs (Savings and Credit Co-Operatives) who were already set up to manage micro-finance transactions, and could help community members buy solar lamps on credit.

At one point in the challenge, the judges said, "Well, we're not sure about this model. Before we give you money to go test this theory on the ground, we want you to mail a solar lamp to a SACCO and try and get them to sell it." First of all, that felt like an arduous next step that wouldn't actually teach us anything. And second, we realized that we didn't actually need their money. We had enough confidence (and cash) to go test it ourselves.

So, we did. And it worked.

What's In a Dependency?

Life is filled with these types of dependencies. Some bad, some good, some just "necessary burdens." My family is a good dependency, they help me prioritize things. TikTok is a bad dependency, it makes my brain think it needs way more dopamine than it does. Venture funding can be a necessary burden. It's not bad, or good, just a tool that isn't necessarily easy to get or use.

But the more dependencies you introduce into building anything, the more you become subject to narrative. The more people who have to believe in something to make it work, the more you're dependent on their belief system.

I've written before about this idea of storytelling. In that previous piece I mentioned the book Sapiens, a critical part of any VC starter kit, where Yuval Harari makes one of his key points:

”There are no nations, no money, no human rights, no laws, and no justice outside the common imagination of human beings."

Storytelling is something I find myself returning to think about again, and again, and again. It can be one of the most powerful forces in the universe. But it is such a double-edged sword. And if you're not careful, it can cut you down as much as it can build you up.

When The Story Is Good

We had a few years there that represented a collective fever dream of storytelling. Everyone bought into almost every story. The infallibility of crypto, stonks only go up, the metaverse is now. The forcefulness of the story felt like we couldn't believe our own judgement. "These valuations don't make sense, but I must be wrong."

I can't tell you the number of people I've talked to who say some version of that. "I was convinced that we had somehow unlocked a new paradigm, and this was the 'new normal.'" But it wasn't. It was a combination of free money, and exuberant hype folks pumping up these stories.

So what happens when the story turns?

When The Story Goes Bad

Kyla Scanlon wrote a piece last summer, that I come back to almost every month, called "The Vibecession: The Self-Fulfilling Prophecy." The main idea is pointed more at the overall macro, but the framing is so dang good.

"There is an element of reality to our existence - policy decisions, manufacturing output, gas prices, etc, cannot be modified by our feeble human minds (at least right now) - it is capital-T-Truth in the Present Moment, whether we like it or not.

The Interpretation of Reality and Truth: But all of those things generate vibes (scientifically speaking) that do most of the work in determining how we feel."

We take experience and evidence, shape out expectations, which warps perception and acts a forcing function for interpretation - and that is How You Feel (in the most simplistic way possible)."

The reality is that the world is, in many, many ways, better than it has ever been before. But there are also things that are bad, and getting worse, both economically and socially. However, reality is not the only thing that dictates decision making. In Kyla's words, our "interpretation of the future shapes [the] narrative, which can shape reality."

What Does This Mean For Venture?

I'm getting to this section a little earlier than usual, but this is an idea that has come up again and again in conversations I've had over the last few months. In this market, every dependency you have as a business is an increasingly at-risk failure point.

The story has changed, and everyone's vibes are off. Pessimism is running rampant, and so much of building a startup is dependent on shared narratives. There are so many people that you have to convince. You have to convince them you can create something out of nothing.

• Fundraising: In a story-friendly time, fundraising could be seen as a point of strength. If you can raise more money, you can grow faster and chase that golden goose of exponential growth (what is this "burn" you speak of?) In a story-skeptical time, fundraising is a weakness. VCs are often just scared-of-their-shadow lemmings who retreat to the safety of "we’re just asset allocators" when things get tough.

• Customer Acquisition Costs: In a story-friendly time, CAC can be seen as a moat. "We have to burn all this cash, it's a land-grab! In a story-skeptical time, marketing is an anchor around your neck. The harder you have to work to attract customers, the less likely it is you can scale. Customers, while not as reactive as your average VC, are also victims of negative sentiment. As compelling of a product as ChatGPT is, it isn't necessarily an isolated technological breakthrough, but it is one of the absolute best customer acquisition growth hacks we've seen in a long time. Millions of users with no marketing.

• Hiring: In a story-friendly time, you want as many people as possible. More is more, and you have a big vision, and everyone's bought in so you want to bring as many people along for the journey. In a story-skeptical time, every new employee is someone else that has to be bought into a story that is going to come under a LOT of scrutiny.

In times when everyone has transitioned from FOMO (fear of missing out) to SOBS (shame of being suckered), you're going to be met with a lot of intense skepticism. The more you can be in control of your own destiny, rather than at the mercy of someone else's faithfulness, the better off you'll be.

Controlling Your Own Destiny

I should caveat this idea with the acknowledgement that every idea requires nuance. Venture capital isn't evil. Bootstrapping isn't the ONLY way to build a business. Everything is a tool. You can accept dependencies, but you should accept them thoughtfully.

Berkshire Hathaway is one of the ultimate case studies in perfectly aligned incentives. Warren Buffett doesn't have a fund lifecycle, he doesn't make money on carry or fees. He just owns Berkshire Hathaway. His salary has been $100K for 40+ years. The only way he makes money is if Berkshire Hathaway stock goes up. So what are his dependencies? Effectively just the performance of his underlying businesses. If the businesses do well, he has more cash to deploy.

He doesn't really need to rely on capital providers. He needs to rely on business fundamentals. Of all his businesses, he's at the center with very few dependencies. You can say something similar about other businesses that are able to drive significant value with fewer employees.

Genevieve Roch-Decter, CFA @GRDecter

Goldman Sachs generated $11 billion in net income last year with 40,000 employees Yet Citadel netted $16 billion with just 2,600 employees

This isn't to say that having lots of employees is necessarily bad. But it's all about dependencies and failure points. The more dependencies you introduce to your business, the more you're at the mercy of other people's narratives.

In a world of naysayers, sad-sops, and storytellers (who are grumpy), look for those opportunities to grow organically, rely on yourself, and build with fewer people who are more bought into the vision. Don't be afraid of dependencies, but only depend on dependencies that are dependable.

**Big thanks to Eugenia (Bejar) Lustgarten and Caroline Newman for jamming with me on this idea this week.

---

Thanks for reading! Subscribe here to receive Investing 101 in your inbox each week: